NOURIEL ROUBINI BLOG tracks the media appearances of Dr Nouriel Roubini his interviews articles debates books news speeches conferences blogs etc..Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics

Saturday, April 14, 2012

Nouriel Roubini : Europe’s Short Vacation

NEW YORK – Since last
November, the European Central Bank, under its new president, Mario
Draghi, has reduced its policy rates and undertaken two injections of
more than €1 trillion of liquidity into the eurozone banking system.

This led to a temporary reduction
in the financial strains confronting the debt endangered countries on
the eurozone’s periphery (Greece, Spain, Portugal, Italy, and Ireland),
sharply lowered the risk of a liquidity run in the eurozone banking
system, and cut financing costs for Italy and Spain from their
unsustainable levels of last fall.
At the same time, a technical
default by Greece was avoided, and the country implemented a successful –
if coercive – restructuring of its public debt. A new fiscal compact –
and new governments in Greece, Italy, and Spain – spurred hope of
credible commitment to austerity and structural reform. And the decision
to combine the eurozone’s new bailout fund (the European Stability
Mechanism) with the old one (the European Financial Stability Facility)
significantly increased the size of the eurozone’s firewall.
But
the ensuing honeymoon with the markets turned out to be brief.
Interest-rate spreads for Italy and Spain are widening again, while
borrowing costs for Portugal and Greece remained high all along. And,
inevitably, the recession on the eurozone’s periphery is deepening and
moving to the core, namely France and Germany. Indeed, the recession
will worsen throughout this year, for many reasons.
First,
front-loaded fiscal austerity – however necessary – is accelerating the
contraction, as higher taxes and lower government spending and transfer
payments reduce disposable income and aggregate demand. Moreover, as the
recession deepens, resulting in even wider fiscal deficits, another
round of austerity will be needed. And now, thanks to the fiscal
compact, even the eurozone’s core will be forced into front-loaded
recessionary austerity.
Moreover, while über-competitive Germany
can withstand a euro at – or even stronger than – $1.30, for the
eurozone’s periphery, where unit labor costs rose 30-40% during the last
decade, the value of the exchange rate would have to fall to parity
with the US dollar to restore competitiveness and external balance.
After all, with painful deleveraging – spending less and saving more to
reduce debts – depressing domestic private and public demand, the only
hope of restoring growth is an improvement in the trade balance, which
requires a much weaker euro.
Meanwhile, the credit crunch in the
eurozone periphery is intensifying: thanks to the ECB long-term cheap
loans, banks there don’t have a liquidity problem now, but they do have a
massive capital shortage. Faced with the difficulty of meeting their 9%
capital-ratio requirement, they will achieve the target by selling
assets and contracting credit – not exactly an ideal scenario for
economic recovery.
To make matters worse, the eurozone depends on
oil imports even more than the United States does, and oil prices are
rising, even as the political and policy environment is deteriorating.
France may elect a president who opposes the fiscal compact and whose
policies may scare the bond markets. Elections in Greece – where the
recession is turning into a depression – may give 40-50% of the popular
vote to parties that favor immediate default and exit from the eurozone.
Irish voters may reject the fiscal compact in a referendum. And there
are signs of austerity and reform fatigue both in Spain and Italy, where
demonstrations, strikes, and popular resentment against painful
austerity are mounting.
Even structural reforms that will
eventually increase productivity growth can be recessionary in the short
run. Increasing labor-market flexibility by reducing the costs of
shedding workers will lead – in the short run – to more layoffs in the
public and private sector, exacerbating the fall in incomes and demand.
Finally,
after a good start, the ECB has now placed on hold the additional
monetary stimulus that the eurozone needs. Indeed, ECB officials are
starting to worry aloud about the rise in inflation due to the oil
shock.
The trouble is that the eurozone has an austerity strategy
but no growth strategy. And, without that, all it has is a recession
strategy that makes austerity and reform self-defeating, because, if
output continues to contract, deficit and debt ratios will continue to
rise to unsustainable levels. Moreover, the social and political
backlash eventually will become overwhelming.
That is why
interest-rate spreads in the eurozone periphery are widening again now.
The peripheral countries suffer from severe stock and flow imbalances.
The stock imbalances include large and rising public and private debt as
a share of GDP. The flow imbalances include a deepening recession,
massive loss of external competitiveness, and the large external
deficits that markets are now unwilling to finance.
Without a much
easier monetary policy and a less front-loaded mode of fiscal
austerity, the euro will not weaken, external competitiveness will not
be restored, and the recession will deepen. And, without resumption of
growth – not years down the line, but in 2012 – the stock and flow
imbalances will become even more unsustainable. More eurozone countries
will be forced to restructure their debts, and eventually some will
decide to exit the monetary union.*Nouriel Roubini is Chairman of Roubini Global Economics (www.roubini.com) and Professor at the Stern School of Business, NYU.
Copyright: Project Syndicate, 2012.
www.project-syndicate.org

Nouriel Roubini was born on March 29, 1959 in Istanbul, Turkey. He is an actor, known for Inside Job (2010), America Foreclosed (2015) and ...

Nouriel Roubini, (born March 29, 1958, Istanbul, Turkey), Turkish-born American economist and educator who was best known for predicting the 2007–08 subprime mortgage crisis in the United States and the subsequent global financial crisis.

Born to Iranian Jewish parents, Roubini moved with his family to Iran and Israel before they settled in Italy in 1962. After a year at Hebrew University of Jerusalem, he studied economics at Bocconi University in Milan (B.A., 1982) and Harvard University (Ph.D., 1988), where he specialized in macroeconomics and international economics. He joined the economics faculty at Yale University in 1988 and taught there until 1995, when he moved to New York University. He also served as a visiting scholar to the International Monetary Fund (IMF), was a research associate with the National Bureau of Economic Research (NBER), held single-year terms on the White House Council of Economic Advisers (1998–99) and at the U.S. Department of the Treasury (1999–2000), and cofounded (2004) the consulting firm Roubini Global Economics. Roubini spent much of his early career studying countries that experienced extreme economic failures, such as Mexico (in 1994), Thailand and other countries associated with the 1997 Asian financial crisis, Russia (1998), and Argentina (2000). He determined that each shared one common element: a massive current account deficit.(www.britannica.com)

Roubini Quote : "The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. "

Nouriel Roubini is the Chairman and CEO of Roubini Macro Associates, LLC, his own global macroeconomic consultancy firm. He is also a professor of economics at New York University’s Stern School of Business. Dr. Roubini has extensive policy experience as well as broad academic credentials. From 1998 to 2000, he served as the senior economist for international affairs on the White House Council of Economic Advisors and then the senior advisor to the undersecretary for international affairs at the U.S. Treasury Department, helping to resolve the Asian and global financial crises, among other issues. The International Monetary Fund, the World Bank and numerous other prominent public and private institutions have drawn upon his consulting expertise.

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